Management accounting update

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Management Accounting Update Paul Gillion www.kaplanfinancial.co.uk Objectives • By the end of this session you will: – Understand how the role of the management accountant has changed from scorekeeper to business partner – Be aware of how shareholder value performance can be measured – Be aware of how an integrated ‘value-based’ forecast is constructed – Be aware of how some businesses have moved beyond the traditional budget model to manage their businesses via a more flexible approach – the ‘beyond budgeting’ model – Be aware of how the balanced scorecard can help support the beyond budgeting model Agenda • The changing role of finance – the need to ‘add value’ • Measuring value performance • Adding value with forecasting • Adding value with ‘Beyond Budgeting’ • Adding value with the Balanced Scorecard Agenda • The changing role of finance – the need to ‘add value’ • Measuring value performance • Adding value with forecasting • Adding value with ‘Beyond Budgeting’ • Adding value with the Balanced Scorecard Self Assessment Exercise Please chose one statement from each pairing which is closest to the way you think about you and your role in the business: • • I am aware of my organisation’s mission statement / objectives I didn’t know we had a mission statement / objectives • • I know who our top five customers are I’m fairly sure we have some customers • • I spend most of my time in the finance department I spend most of my time outside the finance department Self Assessment Exercise Please chose one statement from each pairing which is closest to the way you think about you and your role in the business: • • Most of my discussions are with other finance team members Most of my discussions are with other departments • • I know what each person does with the reports I send them I just send them the reports I always have • I am working in a way which is in line with our strategic goals and I am happy to suggest change / improvements I the job the way I was told to – is it Friday yet? • •Number of pictures taken •Time between taking picture and seeing photograph •Ability to delete incorrect image and re-take •Opportunities to alter image to suit requirements •Picture sharing capabilities WHAT ARE OUR EXPECTATIONS FOR £100 NOW AND YEARS AGO? The changing role of the finance function • Faculty of Finance & Management, ICAEW • October 2003 – survey of members • ‘How will the finance function within business change over the next five years?’ • 567 responses Qualities and skills sought in finance personnel People en t m e g a n a m Inte grit y IT skil ls Legal knowledge Mark et ing Busin e ac um s s en a n o s er rp e t In ls skil Le ip h s r ade l al skills n itio ing d T r a oun t c ac Kn o of wled I AS ge egic t a r t S ng i k n i th Ta x atio n The BSC business management approach Strategy-focused organisations The BSC business management approach Translate strategy into operational terms Strategy-focused organisations The BSC business management approach Translate Strategy-focused organisations Align the organisation to the strategy The BSC business management approach Translate Strategy-focused organisations Align Motivate by making strategy everyone’s everyday job The BSC business management approach Translate Adapt and learn by making strategy continuous Strategy-focused organisations Motivate Align The BSC business management approach Mobilise change through executive leadership Adapt Translate Strategy-Focused Organisations Motivate Align The BSC business management approach Translate Mobilise Adapt Strategy-Focused Organisations Align Motivate (Source: Kaplan and Norton, 2001) A KPI wheel Financial Employee Customer Internal Actual Target Montifiore Hospital’s Balanced Scorecard INNOVATION & GROWTH Looking Ahead Do we have momentum? CUSTOMER Looking from the outside in OPERATIONS Looking from The inside out Are we in control? FINANCIAL Looking Back Did we meet our targets? Your Scorecard What measures would you have under the four headings of: • • • • Financial? Customer? Learning and Growth? Internal? Implementing the BSC approach – some issues ard to c e r o c s e g of th in k n li e r u t (such as s Prema e s s e c o ent pr sation) n e managem p m o c ing and t t e s t e g r ta No strategy to link the scorecard to! er N v o on n o ew i s y u g me Lack of nf olo o a C su education res r te and training Timing issue s– announcing the scorecard to o early or too late No clearly understood objectives for the scorecard programme Ma inc nagem o ‘ba nsis ent p t l (su ancin ent w ractic i exe ch as g’ ph th the es i pro cutiv rewa losop fit p es o rdin hy g erf n orm sho anc rt-te rm e) No executive sponsorship Lac k the of casc s a thro coreca ding o rd f u orga gh the nisa t i on BSC – Top 10 Implementation issues No executive sponsorship Lack of education and training No strategy No objectives for programme Timing Inconsistent management practices No new measures Terminology Lack of cascading 10.Premature links Balanced Scorecard – The Benefits • Translating Strategy into Action • Improved Resource Allocation • Enhances Management Strategic Feedback & Learning • Clear communication of Strategy may highlight divergent views on strategy • Can result in a re-design / simplification of the Budget Process Objectives • By the end of this session you will: – Understand how the role of the management accountant has changed from scorekeeper to business partner – Be aware of how shareholder value performance can be measured – Be aware of how an integrated ‘value-based’ forecast is constructed – Be aware of how some businesses have moved beyond the traditional budget model to manage their businesses via a more flexible approach – the ‘beyond budgeting’ model – Be aware of how the balanced scorecard can help support the beyond budgeting model [...]... FINANCE DEVELOPMENT NEEDS Budgeting Financial Modelling & Forecasting Finance Function Effectiveness Financial Management Performance Measurement /Management Management Accounting Financial Reporting (inc IFRS) MANAGEMENT DEVELOPMENT NEEDS Managing People & Teams Strategic Planning Personal Skills Risk Management Agenda • The changing role of finance – the need to ‘add value’ • Measuring value performance... Commercial approach • Appropriate interaction with the business • Direct links with external stakeholders Analysis of traditional finance function activities Source: Redesigning the finance function, CMA, 1999 Management objectives for finance function redesign •Increased control •Increased profitability •Better information •Competitive advantage •Better integration •Competitive necessity •Improved quality •Market... KPMG Consulting, May 2003 ENRON Collapsed 2nd December, 2001, destroying $60bn in market value Year 2000 accounts reveal: 96% of reported net income and 105% of reported funds flow were attributed to accounting violations Debt reported as $10bn v $22bn actual Source - Malcolm Salter, Harvard Business School Independent business partner strengths • Strong financial controls • Independent view providing... value with ‘Beyond Budgeting’ • Adding value with the Balanced Scorecard What is Shareholder Value? “Is it any wonder we have seen the recent stock market bubble burst when it was originally inflated by management who believed that share price was driven by growing earnings per share? How wrong could they be? The real value is the economic value, which is the net present value of future cash flows discounted... of capital of 10% How much value has the business created in the year? The problem with profit as a measure of value performance • Historic focus rather than future focus • Tenuous link to cash flow • Accounting policy differences can distort underlying performance • Positive profits are achieved with no adequate risk hurdle Economic profit • • • • Re-branding of ‘residual income’ Surplus operating... 100 60 Economic profit illustration: Royal Mail Holdings plc year ending March 2004 Source: Shareholder Executive Annual Report 2004/5 Economic profit – the interpretation • Although successful from an accounting profit perspective, the cost of using investors’ funds is ignored by just focusing on operating profit • Once the full cost of investors’ funds is included (the capital charge) then we have
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